Bob’s Journal for 10/29/20

We received the first official estimate of the state of the Social Security trust fund, and it is not good news.

The trustees of Social Security issue an annual report of the financial condition of Social Security and Medicare. The latest report, issued in April and based on data as of the end of 2019, estimated the trust fund for retirement benefits would run out in 2034.

But the report did not include the effects of the current recession. Payroll tax revenues are well below the estimates in the trustees’ report, because unemployment rose to its highest level since the depression.

Also, many unemployed people are deciding that, instead of seeking new jobs, they will retire and begin their Social Security benefits earlier than previously planned.

Those two forces are draining the trust fund faster than previously estimated. The Social Security trustees won’t update their forecast until next April or May.

But we did receive an interim forecast from the Congressional Budget Office (CBO) as part of its annual report on the federal government’s finances. Buried in the CBO report is an estimate that the recession will cause the retirement trust fund to be depleted by 2031, three years earlier than the Social Security trustees estimated last spring.

Of course, that assumes Congress doesn’t take action before then to bolster the system. That estimate also assumes the economy will be worse than the CBO’s estimates.

As I’ve said before, Social Security benefits won’t end when the trust fund runs out of money, even if Congress doesn’t act.

Social Security receives payroll taxes based on the income of each employee and self-employed worker. Social Security’s chief actuary has estimated over the years that the payroll taxes will pay for 75% to 80% of promised benefits for at least 75 years.

If that estimate holds, the worst case scenario is Social Security benefits are cut by 20%. More than likely, Congress will take some action that doesn’t involve across-the-board benefit cuts.

Instead, those already receiving benefits or who are eligible for them within a few years will be protected, except perhaps higher-income Social Security recipients.

The burden of most of the benefit cuts and tax increases is likely to fall on those who are not close to claiming their benefits. Even so, it is a good idea, regardless of your age, to build some flexibility in your retirement plan. Be sure you can handle benefit cuts or tax increases equal to 20% of your Social Security retirement benefits.

Here Are the Next Big Changes Likely to Come in IRAs and Retirement Plans

Many people were surprised back in 2019 when Congress pushed through the Setting Every Community Up for Retirement Enhancement (SECURE) Act with very little opposition.

The SECURE Act had a number of provisions that increased the ability to save for retirement. It also contained a provision that eliminated the Stretch IRA, upending the retirement and estate plans of many people.

This week, the congressional leaders who put together the SECURE Act announced their next proposal, the Securing a Strong Retirement Act (SSRA) of 2020.

A key to the passage of the SECURE Act was that it had bipartisan support. That’s also the case with this latest proposal. The senior Democrat and Republican on the House Ways and Means Committee jointly announced the legislation.

The SSRA has a number of positive provisions. The bill would raise the age when required minimum distributions (RMDs) must begin to 75 from the current 72. SSRA also would exempt from RMDs individuals with retirement account balances of less than $100,000.

Taxpayers age 60 and older would be allowed “catch-up” employer retirement plan contributions of up to $10,000. The Retirement Saver’s Tax Credit would be increased and would be available to more taxpayers.

The annual maximum amount of qualified charitable distributions would be increased to $130,000 from the current $100,000.

There are other provisions that would make it less expensive for small businesses to provide retirement benefits and make it easier for people to save for retirement.

Left out of the bill so far is how Congress will pay for all these benefits. It will have to do that by decreasing other benefits or increasing taxes, as it did in the SECURE Act by eliminating the Stretch IRA.

The bill’s sponsors hope to have it enacted this year when Congress reconvenes after the election. If not, they’ll work to enact it next year.

I’ll be following its progress closely. I’ll especially be looking for the last-minute proposals to pay for the benefits of the bill.

The Data

New unemployment claims for the latest week declined by 40,000 to 751,000, their lowest level since March 14. That still exceeds what was the highest level before the pandemic.

Continuing claims declined by 709,000 to 7.75 million. The total number of people receiving benefits under all unemployment compensation programs, including the Pandemic Unemployment Assistance program, declined by 415,727 to about 22.7 million.

The PMI Composite Flash Index for mid-October increased to 55.5 from 54.3 in September. The mid-October reading is a 20-month high.

The services sector index increased to 56.0 in October from 54.6, with the October reading also being a 20-month high. The manufacturing sector index reached a 21-month high at 53.3, compared to 53.2 in September.

Sales of new single-family homes in September declined by 3.5% from August’s sales level. Also, the sales for the three months before September were revised to lower levels.

Even so, new home sales are strong. Over 12 months they increased by 32.1%. September’s sales were the third highest since 2006, with July and August sales being the two highest sales months since 2006.

The S&P Corelogic Case-Shiller Home Price Index reported a 0.5% monthly increase for August, down slightly from the 0.6% increase in July. Over 12 months, prices increased 5.2%, compared to 3.9% as of July.

The FHFA House Price Index increased 1.5% in August, compared to 1.0% in July. Over 12 months the index increased 8.0%, compared to 6.5% in July.

Durable Goods Orders in September increased 1.9%, compared to a 0.4% increase in August. Excluding transportation, orders increased 0.8% in September and 0.4% in August.

Core capital goods orders, which are considered a good measure of business investment, increased 1.0% in September. That is down from the 1.8% increase in August.

The Richmond Fed Manufacturing Index rose to 29 in October from 21 in September. The October reading is the highest on record for this index. All components of the index were positive, except employment which was unchanged.

Manufacturing activity in Texas continued to expand, according to the survey by the Dallas Fed. The General Business Activity index developed from the survey increased to 19.8 in October, which is a two-year high. In addition, the Production index increased to 25.5 from 22.5. This is the fifth consecutive month of expansion in these indexes.

The Kansas City Fed Manufacturing Index rose to 13 in October from 11 in September. But the index was 14 in August and still is lower than a year ago.

Consumer Confidence as measured by The Conference Board declined a little in October to 100.9 from a revised 101.3 in September.

It’s no surprise that the first estimate of GDP growth for the third quarter showed the economy recovered a lot of the ground it lost in the second quarter. GDP increased 7.4% in the third quarter, which is a 33.1% inflation-adjusted annual growth rate.

That means the record decline in the second quarter was followed by record growth in the third quarter. The growth was the result of both economic activity resuming and government stimulus. Even so, GDP still is about 10% below its level before the pandemic.

The Markets

The S&P 500 lost 4.69% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 5.85%. The Russell 2000 fell 3.81%. The All-Country World Index (excluding U.S. stocks) dropped 4.12%. Emerging market equities sank 2.80%.

Long-term treasuries rose 1.26% for the week. Investment-grade bonds increased 0.15%. Treasury Inflation-Protected Securities (TIPS) added 0.12%. High-yield bonds fell 1.37%.

The dollar increased 0.96%.

Energy-based commodities lost 3.92%. Broader-based commodities fell 3.26%. Gold declined 2.61%.

Bob’s News & Updates

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